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LATIN AMERICA A faultline spreading south and full of grim prospects

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With electrical energy rationing in Argentina having stretched to three months—bringing down steel production and overall economic growth—the alarm bells are ringing throughout Latin America.

Chile, partly dependent on now-uncertain supplies of imported fuel—including natural gas from Argentina—and which is facing a water supply shortage to boot, has acknowledged that energy problems threaten the continuation of its recent buoyant economic growth rates.

Venezuela is having difficulty implementing its ambitious South American gas pipeline project, possibly because of political misgivings on the part of its Latin American neighbors.

Prices of Bolivian natural gas have skyrocketed since the government nationalized its oil and gas industry in May 2006.

And a report from Brazilian think-tank Instituto Acende Brasil, published in early August, said that the probability of Brazil facing a new round of blackouts by 2011 is now up to 32 percent.

The warning bells grew louder in Brazil with the revelation that oil and gas producer Petrobras SA has insufficient natural gas to honor a contract with local thermal power stations. In addition, initial free-market auctions in late July to sell sugar-cane-based biofuel aroused scant buyer interest.

All this follows a natural gas supply and pricing crisis in Mexico, which during the past two years has hit hard such consumers as the country's direct-reduced iron (DRI)-based steelworks, including the ArcelorMittal (former Imexsa) slab plant, whose output cuts were held partly responsible for the past year's increase in slab prices. The natural gas crunch would now seem to be moving south through Latin America as more new projects are planned to use the commodity, despite the continuing precariousness of regional supplies and pricing structures.

Brazil's DRI-based Ceara Steel is a case in point. After serious and apparently unsuccessful lobbying of Petrobras for a natural gas price discount, the joint venture of South Korea's Dongkuk Steel Mill Co. Ltd., Italy's Danieli & C. SpA and Brazil's Cia. Vale do Rio Doce (CVRD) reportedly is now considering a technology change away from DRI because it may be the only way the project can go ahead.

Argentine steelworks Acindar Industria Argentina de Aceros SA has taken its DRI plant out of action during the country's energy crisis. This has allowed the company, part of ArcelorMittal, to carry out the necessary engineering work on the plant for the steelmaker's current expansion. However, the question remains as to how the new 1.75-million-tonne-per-year capacity at the DRI and electric-arc furnace works will fare, given the uncertain future of energy supplies in Argentina.

Brazil's complex energy question also is viewed as a major reason why the country is now attracting new bauxite and alumina projects—for instance, the major 7.4-million-tonne-per-year Hydro Aluminium AS and CVRD project announced in July—but building relatively little new primary aluminum capacity.

The same goes for copper in Brazil. New mining and concentration activity grows apace, but smelting is limited to a sole plant, Caraiba Metais SA, whose planned expansion is progressing slower than expected.

Observers could be forgiven for noting that the grim energy panorama throughout Latin America may condemn the region to continue to be an exporter of mineral commodities rather than energy-intensive finished metal products.

Governments are doubtless learning energy management tactics from the recent experiences. Argentina has been criticized for allowing power cuts to impact industry, commerce and households alike, even affecting the distribution of bottled butane gas for household cooking in what has been one of the country's most rigorous winters.

What has happened in Argentina is recognized as being the result of short-term populist measures, unsuitable for a sector like energy where long-term planning is essential. In an attempt to improve the lot of the majority after an earlier period of hyperinflation, Argentina President Néstor Kirchner froze the nation's electrical energy tariffs, discouraging new private sector investments in generation and distribution.

The Brazilian blackouts also were attributed to lack of sufficient investments in power generation, again because of the existence of a more-controlled market under former President Fernando Henrique Cardoso, which has been replaced by a free market under Lula's regime in an effort to encourage new sectoral investments while at the same time reducing or at least stabilizing energy costs for consumers.

Lula is now anxious to speed up three big hydroelectric projects in the Amazon—despite Brazil's strengthening green lobby—in a move to avert the threat of new blackouts. The concession for the first of these, the 3,300-megawatt Santo Antonio project in Rondonia state, is set to be auctioned in October and is expected to attract significant international and local investor interest. This should be followed by the auction of the concession for the 3,100-MW Jirau project, also in Rondonia, and the first phase of the 11,000-MW Belo Monte project in Para state, the most controversial as it would be sited partly in indigenous Indian territory.

Bolivia, Chile, Colombia, Ecuador and Peru announced in late July that they will undertake a feasibility study into regional energy integration based on construction of a gas pipeline network with international investor support.

One thing is for sure If copious new investments in power generation and distribution do not materialize almost immediately, medium-term energy supplies may be insufficient to support the continuing upturn in economic growth rates throughout Latin America, hitting capital-intensive metals industries head on.

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